Holly Bennett
Not everyone’s finances and personal circumstances are the same. So the life insurance you need to protect your family, and the monthly premiums you can afford, won’t match what’s right for someone else.
When it comes to choosing, focus on what matters most to you, and use this overview of the different types to help you weigh up your options.
The main types of life insurance
Life insurance tends to fall into the following categories. Bear in mind that each type of life insurance has its pros and cons, and there is some crossover.
Term life insurance
This is life insurance that lasts for a specific period of time (or term), such as 10 or 25 years. You pay regular premiums and the insurer pays out a lump sum if you die. When you apply for term life insurance, you choose between level, decreasing and increasing term cover.
Level term life insurance
- Premiums are usually fixed and the cover amount stays the same. So say someone has £80,000 of cover, that’s what the payout amount would be, regardless of when they pass away, provided it’s during the policy term.
- It lets you leave your family a fixed amount if you die while you are covered. This might be used to manage costs, such as mortgage or rent payments, bills and childcare, or to help maintain their standard of living.
Decreasing term life insurance
- Premiums are fixed, but the cover amount decreases over time, in line with what you owe on a repayment mortgage or other long-term loan.
- The idea is that the payout if you die would be enough to pay off the mortgage or other large debt at whatever point a claim is made. So the lump sum would be larger at the beginning of the policy than near the end. Because the cover amount decreases, it’s usually cheaper than level cover.
Increasing term life insurance
- Some insurers offer the option to protect the lump sum from the effects of inflation, so it won’t be worth less over time.
- If you choose inflation protection, the cover amount increases by a set amount each year, or is index-linked and rises in line with the retail prices index (RPI) or consumer prices index (CPI).
- As your cover amount increases, your premiums will usually also increase, typically up to a maximum amount.
Term life insurance pros and cons
- Pros:This can be a more affordable type of insurance, as you’re only covered for a specific period of time. You can choose whether to protect a debt you’re paying off or a fixed lump sum, so it’s flexible.
- Cons: Similar to other types of life insurance, if you live beyond the end of the policy term, you won’t get anything back.
Whole of life insurance
This cover lasts for your entire lifetime. So, whenever you die, as long as you’ve kept up with your premiums, the insurer will pay out. Depending on the type of policy, your premiums and cover amount may be fixed for life or, if they are linked to investments, may change over time.
As this type of cover isn’t time-limited and the insurer will pay out regardless of the timeframe, it’s usually more expensive than term life insurance.
Whole of life insurance pros and cons
- Pros: The payout is on death and isn’t limited to a specific window, so could be useful for helping with funeral costs or an inheritance tax bill. You may feel reassured that there would be a payout whenever you die.
- Cons: Premiums can be expensive when compared with term cover.
» MORE: How whole of life insurance works
Joint life insurance
This is where a policy covers two people, but only one application and premium is needed. Most are first death policies, which means they’ll pay out to the surviving partner on the first death and will end after that.
This could be useful for people in long-term relationships who want to make sure their partner is financially supported when they’re gone. It could also be for business partners where the payout might help the business they share to continue.
Second death policies, which are usually whole of life cover, pay out on the second person’s death. This may be useful for inheritance tax planning.
Joint life insurance pros and cons
- Pros: It may be cheaper than taking out two separate policies if you are a couple, and easier to apply for and manage, as there will be one application and one monthly premium to pay.
- Cons: If the relationship ends, it may not be straightforward. Some insurers offer splitting the policy into two single policies, or converting it to one policy. This may affect your premiums, and the other person may need to take out a new policy, which is likely to cost more, as they will be older than when the joint policy was taken out. Or the insurer might only offer to cancel the joint policy.
Over 50s life insurance
This is a type of whole life insurance for people aged 50 and over. You choose a premium and your loved ones get a guaranteed payout when you die, as long as you’ve kept up your payments. Over 50s cover can’t usually be taken out as a joint policy. There is usually no medical underwriting involved, so a medical might not be needed to get this type of cover.
Over 50s life insurance pros and cons
- Pros: You probably won’t need to have a medical.
- Cons: You could end up paying more in total premiums over time than the eventual payout, if you live a long life. If you are in good health you may secure cheaper premiums through standard insurance policies instead.
» MORE: How over 50s cover works
What is the best type of life insurance to get for my circumstances?
The best life insurance for you depends on your family and finances, and what you want the sum to help cover. Your age, health, lifestyle and total cover amount will affect the cost, and what you can afford to pay is important too.
If you’re not sure which type is right for you, it might help to talk to an insurance broker or financial adviser.
What do I need to consider when choosing the right life insurance?
There are a few things you might want to think about when you’re deciding on the type of cover to go for.
Term vs whole of life insurance
Will there be a time when your financial commitments will be reduced? This might be when your children have flown the nest or you’ve paid off your mortgage. Or are you willing to pay higher premiums, knowing there would be a payout whenever you die, perhaps to help cover your funeral bill or take care of a potential inheritance tax bill?
Term life insurance isn’t about predicting when you might die. It’s about how long the financial commitments you would want to cover are likely to last, and when that payout amount would be needed.
» MORE: How life insurance trusts and inheritance tax work
Single vs a joint policy
If you’re the main earner in a relationship, you may decide that a single policy, where only you are covered, is enough. Consider the financial impact of losing your partner, whether that’s their salary or care-giving they might provide, and if a joint policy might be worthwhile. Or you may decide that the two payouts that would be possible with two single policies would be a better outcome for your beneficiaries. Getting a quote joint and single cover will help you see the difference in cost.
» MORE: Are two life insurance policies a good idea?
Level vs decreasing cover
Think about what you’re looking to cover. For example, if you want a fixed sum to help your loved ones keep up their standard of living and pay bills and other general costs and expenses, you could look at level cover.
If your prime reason is to cover a repayment mortgage and you want to pay less for your cover, you may want to consider decreasing cover.
Your age, health and lifestyle
Life insurance generally costs more to take out if you’re in poor health or have a history of medical conditions. Premiums are also higher the older you are. Your lifestyle, such as if you have a risky job or hobby, smoke or are a heavy drinker, will also have an impact.
If these issues affect you and you’re age 50 or over, one option is over 50s life insurance, which usually involves no medical and guaranteed acceptance. It’s worth knowing that cover amounts for over 50s life insurance tend to be less than for standard life insurance, and most likely wouldn’t be enough to provide for your family financially.
Image source: Getty Images
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